AB Volvo

Ladies and gentlemen, my name is Claes Eliasson and I want to wish you welcome to this press conference and this meeting covering the first quarter 2021. We will, as usual, be listening to a presentation by the Volvo Group President and CEO, Morten Lammstedt, followed by a presentation by Chief Financial Officer, Jan Ytterberg. When done, we will open the line for a Q&A session where it would be sweet if you could limit your questions to two in order to make more room for as many of you as we can. All right, the ground rules are set. And by that, Morgan, I will hand over the presentation to you.

Thank you, Claes, for that. And also from my side, welcome then to this call covering the quarter one performance of the volvo group and this has been another quarter that has really been characterized by both performance and transformation by the group performance of course what we see and you have probably seen that in the report also a strong customer demand both on new and used vehicles as well as services As we have also communicated, following that very strong demand that we have experienced certain supply constraints and stop days on the truck side and a little bit more also in quarter two that we will cover later. But despite the challenges, we deliver a record margin for the group and also seeing a strong development in all business areas, also including buses. I have to say that is very much related to the restrictions on travels, et cetera, but when it comes to the cost control. On transformation, continue to be forward-leaning, taking a number of very important steps when it comes to partnerships in areas where we are complementing, we have complementing strength in order to do the transformation into fostering free and more safe and productive transportation systems. So I have to say, and I think I speak for all of us that are in the room here, Jan and Jan and myself, and Christer and Claes, I mean, there is There is not a dull moment in this industry. There is always something happening. But from that perspective, of course, the underlying trends here are very positive. So if we go to the summary of the quarter, as I said, high activity levels among our customers and thereby also a strong underlying revenue growth of 13% if you take away currency effects. Just an operating margin increase with 4.8 percentage points to a record level of 12.6. Just maybe out of curiosity, it was 12.5% in quarter two of 2019. And we also achieved a strong cash flow, normally rather weak quarter one, but strong here with almost 6 billion positive. And the return on capital employed of 17%, of course, then 12-month rolling, including the very weak quarter two last year, and a rich balance sheet in 2020 also. But also, as I said, we have continued to pave the way for the transformation of our industry through a number of important steps, strategic partnerships, but also launches of new products. Partnering with outdoor innovation of hub-to-hub autonomous solutions in U.S., complementing our already strong partnership with NVIDIA. Partnering with Daimler on fuel cell and the hydrogen economy, also important to complement the battery electric executions, our joint venture operational now. And also, of course, the very important strategic alliance with Isuzu also, following the transfer of UD Trucks into Isuzu, where I have to truly thank our, I have to say, previous colleagues, but future partners in UD Trucks also for a fantastic job over the last years and quarters, handing over UD Trucks in good shape, strong momentum, and thereby also forming a very good platform for the future together with Isuzu. When we look into the deliveries of trucks, it was growing with 16% year-over-year, with strong developments in all regions, and not at least with a positive momentum in the imported regions for the group of Europe and North America. Volvo Construction Equipment also had a very strong quarter, deliveries of 31,000 units, of course, very much on the back of the spring season in China, but also that we see dealers in Europe and North America gearing up for their spring season that is now occurring in quarter two. And deliveries were up with 53% year over year. Then we also have some highlights and a historic milestone for our industry. Following our ambitions and announcements on the capital markets day where we have been talking about the importance of transformation, that we are getting everyone on board and that we are transparent about how the movement into fully electric vehicles and equipment are going. uh we are from now on disclosing orders and deliveries on full electric equipment to bring transparency of the ramp up and also to bring if i may say so positive pressure to all of us when it comes to this very important transformation it's about uh of course us together with customers and customers' customers, but it's also about the infrastructure built out, it's about the green generation of energy, it's about the grid capacity and other things. So here we really would like to put a stick in the ground now and talk about that in full transparency. In addition to these figures, we are also, of course, continuing to sell solutions when it comes to hybrid solutions, primarily on the bus side. And they are not included in these figures. That only relates them to fully electric vehicles and equipment. Then I can also mention, because I will talk about that later, that the Volvo Trucks side have just launched also the sales start of the heavy part of the heavy-duty segment for FH, FM and FMX. and we are already now opening the books even that we will start deliveries on the second half of next year and that is related to the fact that that it takes time to get with customers to really go through the the need of charging and infrastructure etc those figures are not included here because that they are more seen as letter of intent so far but we have very good interest and and also letter of intent activities in that sector. But here it is the commercial contracts, it is what we have in the order board, it is what we have in commercial deliveries and not pilot deliveries. So this is the serial production of our different ranges. And as you can see, Still relatively small figures but it will gradually become bigger and bigger for different segments and regions and again very important for all of us to be able to follow and to see that we are really doing this transformation and having a leading position. And we can also see that we have a positive development. I mean, year over year from nine to 171 units and also book to bill where orders are almost two times higher than delivery. So this will be a very interesting path to follow for all of us. We are super excited about it and great interest from customers. And I can say also the quoting activity is very high here. If we move to service sales, also another news. We have said also that we will include the financial services in our service sales. That is natural. We are gradually moving into business models. where more of the sales will be done as equipment as a service in the coming years, and therefore we are including financial services, since that is a very important part of the complete deal, not at least linked to the move into electromobility autonomous solutions, where you have the abatement between equipment, energy costs, repair and maintenance, and the whole, so to speak, structure when it comes to cost per kilometer or when it comes to monthly installment or what have you. So we think that it's also giving even better transparency in our journey towards the service targets that we have in the group. During this quarter, service sales grew with 5% adjusted to currency, which is again reflecting the high activity level among customers. We have had also on this side, of course, strange supply chains, but the organization is continuing to handle that way well together with our customers, because truck and machine utilization is on par or above pre-COVID-19 levels. And we are also continuing to focus on increasing service contract penetration and duration. The bus and coach business continues to be severely hit, as we said, by the pandemic related to the extensive travel restrictions, mainly done for intercity bus travels as well as for tourism segments. But as you can see, we see in Penta recorded very high increases of 12 and 20% respectively. Moving to trucks. The market situation, the forecast here is based, as you can understand, on current visibility on both demand and supply. And a strong order intake will make supply the decisive factor for some corporates, as we are now trying to meet the demand step by step. and in this situation we are keeping the forecasts unchanged in relation to what we reported in relation to the quarter four last time with the exception of china europe and north america we see a continued strong e-commerce trend people working and shopping from home there is a lack of truck transport capacity resulting in strong fleet utilization low inventories of used vehicles that further drives demand on new vehicles And it is, of course, still early days in 2021, and it's difficult to assess how the supply ramp up will be time-phased here now. We are currently not planning for any further adaptations of the plant production, as previously announced, but visibility is still low, of course. So our market forecast for both Europe and North America remains unchanged for the 290,000 for both regions. Brazil, we see an export boom due to the devaluation of the Brazilian real, but also, of course, record harvest in 2020. Better prices of raw material, very important for the Brazilian economy, and thereby transport needs. Forecast unchanged at a good level of 95,000. India, truck market continued to regain momentum on the back of increased freight volumes, infrastructure development, and pent-up replacement needs. could be disturbed, unfortunately, by the next wave of the pandemic in India, but the forecast remains unchanged also here. And as I said, in China, subsidies for replacement of vehicles with CM3 emission levels or lower than drove the heavy-duty market or heavy-duty and medium-duty market, I should say, to an incredible 95% growth in quarter one. And as a consequence, the forecast is upgraded with 140,000 units, up to almost 1.6 million units. Very strong book to build during the quarter. And, of course, reflecting again the high activity levels, orders increased with 126% year-over-year and deliveries with 60%. We see a particularly strong book-to-bill situation in North America and Europe, as you can see on the graphs here, resulting in an order book that is on all-time high level. As we have communicated also, this steep increase of demand, this very positive situation, have led to planned production increases in several steps that we have done, with more and more strained supply chains as a consequence. That is of course normal, but we have also seen that the semiconductor shortage has led to a planned two to four week production stop in beginning of Q2, and that is still the plan. We do not currently plan further stop days, but visibility is low. It has improved somewhat, but still low if you compare to normal planning horizons. And the gradual production increases that are needed to meet the very positive demand and to execute the order backlog is of course the highest priority and will continue to be a balance between production planning and supply situation to really utilize every single situation at the limit from a positive side. When it comes to market shares, in Europe, for Volvo and Renault, it was flat versus 2020. Volvo stayed at a good level of a little bit more than 17%, and Renault at 9%. And in North America, Volvo Trucks has gained share gradually to 10.3%, whereas the Mach is rather stable with 6.6%, a small decrease here in the beginning of the year. Mortgage share in Brazil was almost 21% compared to our normal levels of 22, 23%. And it's mainly related to low levels of ready trucks in the pipeline here of incoming inventory into the year. We have also in Brazil a very good order book and all focus here also is on executing. Australia coming in also with the same situation, low inventory into our vehicle operations and thereby long lead time but strong momentum. And for UD, as I said, we had a very strong finish by the UD team in the Volvo family context with increases across all key markets and not least in Japan with a market share of 17%, so very strong achievements. And finally, as I said, still relatively small numbers, but the electric heavy duty done about 16 ton market share in Europe. So heavy and medium duty market share in Europe is 53% combined for Volvo and Renault. We are also proud of several important news during the quarter in the truck segments. Broadening the electric offering in Europe into the upper parts of the heavy-duty ranges both for Volvo and Renault. As I stated, we have now started sales for FH, FM and FMX. That is really, so to speak, the core heavy-duty segments. We have the deliveries to start in the second half of 2022. Renault Trucks have also announced their roadmap for the upper part of the heavy duty segment with their electric product offering from 2023. And the potential is actually very interesting because when we look at our connected fleets and coverage on daily mileages and ranges, etc., We see with the right type of build-out of infrastructure, planning together with customers, we can actually, with those news now, cover up to 50% of the transportation need over the next couple of years here. And as I said, there is a broad customer interest for electric trucks in Europe, both from transport operators but also transport buyers. And we are really looking to... forward to continue to reduce together the CO2 footprint and to take the full benefit of this fantastic offering. Volvo Energy, as we have started to be operational during this quarter, will also play a very important role in this transformation. The fuel cell joint venture hydrogen or fuel cell electric vehicles and the development and production of the fuel cell stack together with Daimler under the joint venture name of Cellcentric. Also great start operational as from 1st of March. Very important signal obviously that it will be a very important complementing factor to battery electric and fuel cell electric vehicles in order to do the transformation. And Volvo Group also broadening the technology reach in autonomous vehicles by cooperation on the hub-to-hub on-highway applications with Aurora Innovation, complementing our strong collaboration with NVIDIA also. So we have a very strong setup now when it comes to autonomous solutions for different types of segments, regions, and customer applications. Moving into construction equipment, the forecast also here of course is based on current visibility on both demand and supply. But having said that, it is a very strong momentum in all regions. We have done changes to the market forecast since last quarter in a number of regions. For example, an increase of 5 percentage points in North America of the total market, 10 percentage points in South America, and 5% in Asia and 10% in China. Maybe as a comment on China, the Chinese market is currently difficult to assess due to the stimulus impact on the market size. quarter one was very strong again but we still estimate that the second half of the year similar to the track side will cool off and we also judge that to be healthy if that is happening to avoid a bubble given the very strong development that we have seen over the last quarters here On orders and deliveries, the same here. We see strong construction and infrastructure activities across regions and markets. VC had a positive book to build despite a strong increase of deliveries of 53%, of course very much related to China, but also in other regions. Also in these segments, there is a good fleet utilization among our customers and not at least in mining. As a result of the positive development, we have low dealer inventories and pipeline. And Volvo CE has not been as affected as trucks with regards to supply shortages of, for example, semi-conductors. Buses continue to be very difficult, impacted by COVID-19 with the restrictions on travels and tourism. But also in certain cities on the public transport systems, order decreased with 68% and deliveries with 26%. So the most impacted product segment is coaches with very low fleet utilization and also declining service businesses we talked about earlier here. But I have to say that Volvo Buses is doing a very good job keeping costs to a minimum, which will serve also as a good platform when we gradually will move out from the pandemic and restrictions will gradually be taken away here. Also an important order with the newest execution of the hybrid buses, the 7900 with S-charge. It's a very interesting self-execution. recuperating technology and also including with a very smart zone management system where you can decide for the zero emission zones and the zero noise zones etc so very innovative and promising and the first larger order here is for 64 buses to Belgium so again another important proof point Penta, the segments of marine, leisure, industrial, off-road in particular, but also to some extent in other segments, showed good growth. And in total orders, we did see an increase with 27% and deliveries with 7%. We are also in this segment utilizing the platforms and technologies and innovation of the group and doing specific adaptations to core segments of Penta. Here you see together with Pico, the largest terminal tractor fleet owner and operated in North America, where we are really working in close collaboration to develop the next step of emission-free and fully electric executions on terminal tractors. And on a final note, financial services also solid performance, resulted in record new business volumes for quarter one. Finance units on a 12-month rolling period exceeded 63,500 units, a great cooperation with all other business areas, as I talked about before, the importance of that. And the penetration for financial services 12-month rolling was 31%, and that is the highest rolling 12-month penetration ever. And we've also seen that the good activity level is resulting in improved customer profitability, stable portfolio performance with the lower rates of modifications, credit provisions and write-offs. So with that, Johan Ytterberg, I'll hand over to you for the financial update.

Thank you, Martin. So just another quarter with impressive leverage as volumes are high and cost control good. There were negative effects on deliveries and costs in this first quarter due to shortages in general, COVID outbreaks and restrictions, as well as weather-related issues in North America. The first quarter last year was, on the other hand, negatively affected by measures to halt the pandemic outbreak, and the lost days of production were on a similar level between the quarters. COVID-19 as such, in combination with supply constraints, called for a continued cost and cash Moving over to net sales for the group, they increased by 3%, but adjusting them for currency, net sales increased by 13%. The Swedish krona has appreciated against all major currencies compared to last year, but the weaker US dollar and Brazilian real affect more substantially, given a combined FX effect on net sales of close to 10 billion. And as a consequence of FX, As you can see, both North and South America had lower net sales despite increases of vehicle deliveries of over 20% and close to 15% respectively. Region Asia was positively impacted by the increased machine deliveries and partly to an improved truck volume. And China was the main contributor behind this. The first quarter last year, as you remember, was negatively affected by measures to halt the pandemic in China. If we move over to the group's earnings, high volume of vehicles and services in combination with good cost control, that is a prescription for strong earnings. The adjusted operating income increased some 4.7 billion to 11.8 billion, and we had a margin of 12.6%. And it is comforting to see that the substantial part of the improvement of earnings comes from what we can call own achievements, mainly related to cost, but also to prices and then mainly related to services on that side. and only to a minor extent actually comes from what we can call market-driven effects like the increased total market demand, and of course also we have a negative FX effect. The helping from raw material has so far had limited effect on earnings. Focus for us now going forward is to accelerate ambition and activities in certain areas like R&D while maintaining the cost discipline. There was a negative effect coming from market and product mix in the core remainder related to construction equipment, but also to Group Trucks and Penta. Headwind from FX continued and was some 1.1 billion negative this quarter, reflecting then once again the strongest Swedish Krona in general and the weakening dollar in Brazilian Real. FX transaction effect for the full year 2021 is now expected to be close to zero, provided present FX rates, and we do not provide forecast for the full FX on operating income for 2021. Moving over to the cash generation, as Martin was into it, first quarter is a seasonal weak cash flow quarter when working capital is being built up for a stronger second quarter as regards deliveries. Despite this, operating cash flow in industrial operation was 5.7 billion in the first quarter. Third quarter was negatively affected by shortages, which impacted inventory negatively. We saw a higher sequential machine deliveries, and of course that affected receivables negatively. but this was offset by increased payables reflecting the high production pace. We continue to be on historical low or very low inventory level on used vehicles. Naturally, net cash position in industrial operation, it was some 75 billion here in the end of the quarter, i.e. on the same level as the end of 2020, as the positive cash flow effect in the first quarter was offset by the payment for the shares for 50% of the fuel cell, Jones Ventures cell centric. Moving a little deeper into the segments then, starting with group trucks. So for them, yet another quarter at some 13% margin for group trucks, where all truck business areas contributed positively. Adjusted operating income, some $7.5 billion, an increase of $3.6 billion compared to the first quarter last year, despite the headwind from currency. And the same explanation of improved adjusted operating income as for the group was valid also here for our main segment, the group tracks. But beside improved volumes and good cost execution, we shall mention the improved JV income, mainly related then to downfall, which had a strong delivery quarter, whereas the first quarter last year was heavily affected by restrictions to halt the pandemic in China. Huge truck business have improved substantially across our truck brands and are now at historical good levels. The negative effect was related to a comparably lower share of Volvo branded trucks related to moderate increases of deliveries in Europe and South America, reflecting the halted production due to shortages in Europe and COVID restrictions in Brazil. The increase of heavy-duty vehicles was lower than the increase of medium-duty and light-duty vehicles, and that had an impact on product mix as well. Moving over to construction equipment, where we have a sharp increase of deliveries of 53%, mainly then related to STLG and Chinese market, even if we see increases across the regions. And that limited the increase of FX-adjusted net sales to 34%. The first quarter last year was negatively affected by the restrictions to halt the pandemic in China. That's why we see these big differences besides the strong market as such in China. Service demand and revenues continue to improve, reflecting the higher machine utilization. Besides the positive effect on earnings from higher volumes, the capacity utilization improved and the cost execution on indirect expenses impacted positively. whereas the mix impacted negatively with high Chinese deliveries where gross margins are lower than average and where the price competition is fierce. FX impacted negatively by 0.6 billion. An adjusted operating income increased from 1.1 billion to 3.8, giving a margin of historical high, 15.4% for being a first quarter. If we move over to buses, What I call the survival of the fittest race continues for the bus business, as demand still is hampered by reduced personal mobility around the globe, and bus fleets standing idle also here in the first quarter. This affects service revenues, and this affects deliveries of new buses, where the coach and tourist segments are especially hurt. And as a consequence, capacity utilization was low, but cost execution on selling admin and R&D was strong. So just that operating income was just below break-even for this quarter. And for Penta, demand and volumes of both engines and service continued to increase. For engine deliveries, this was related to the industrial segments, particularly in Brazil and China, whereas the increase in service volume was most pronounced in marine leisure segment and in North America due to the early start of the preparation for the boating season. The improved volumes together with good cost execution in R&D, selling and out being contributed positively, but were partly upset by a negative product and market mix. With more of lighter engines and more of sales in South America and Asia, as well as a negative FX effect of close to 100 million compared to the first quarter last year. All in all, an improvement of adjusted operating income of 135 million to 643 million, giving a historical good margin of 18.9%. And coming into the last segment, financial services, adjusting for currency. New retail financing and credit portfolio were higher than last year, as deliveries and market penetration on customer finance improved. Customer's payment ability and payment performance improved, and write-off levels were low, except for certain bus customers. And as a consequence, credit provision expenses were normalized here in the first quarter this year. Credit reserves for potential future credit losses is kept conservative and stable. In the first quarter last year, the credit provision expenses increased substantially, reflecting at that time the increased modification request and general uncertainty related to COVID-19. All in all, adjusted operating income improved from 75 million to 682 million. Besides the lower credit provision expenses, the portfolio growth contributed to the improvement, which was partly offset then by a negative FX effect of some 115 million. By that, Martin, I ask you to sum up.